ForeCastle

Margin and leverage

In order to understand a forex margin call, it is essential to know about the interrelated concepts of margin and leverage. Margin and leverage are two sides of the same coin.Margin is the minimum amount of money required to place a leveraged trade, whileleverage provides traders with greater exposure to markets without having to fund the full amount of the trade. It’s important to remember trading with leverage involves risk and has the potential to produce large profits as well as large losses.

What causes a margin call in forex trading?

A margin call is what happens when a trader no longer has any usable/free margin. In other words, the account needs more funding. This tends to happen when trading losses reduce the usable margin below an acceptable level determined by the broker.
Below are the top causes for margin calls, presented in no specific order:

• Holding on to a losing trade too long which depletes usable margin
• Over-leveraging your account combined with the first reason
• An underfunded account which will force you to over trade with too little usable margin
• Trading without stops when price moves aggressively in the opposite direction.

What happens when a margin call takes place?

When a margin call takes place, a trader is liquidated or closed out of their trades. The purpose is two-fold: the trader no longer has the money in their account to hold the losing positions and the broker is now on the line for their losses, which is equally bad for the broker. It is important to know that leverage trading brings with it, in certain scenarios, the possibility that a trader may owe the broker more than what has been deposited.



How to avoid margin call?

Leverage is often and fittingly referred to as a double-edged sword. The purpose of that statement is that the larger leverage a trader uses – relative to the amount deposited - the less usable margin a traderwill have to absorb any losses. The sword only cuts deeper if an over-leveraged trade goes against a trader as the losses can quickly deplete their account.
When usable margin percentage hits zero, a trader will receive a margin call. This only gives further credence to the reason of using protective stopsto cut potential losses as short as possible.



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